Hungarian Prime Minister Hits Privatization Brakes

By
Colin Woodard, Special to The Christian Science Monitor /
February 8, 1995

BUDAPEST

THE unexpected resignation of Hungarian Finance Minister Laslo Bekesi last month is sending a signal to investors that the former communist nation's successful privatization program could be in trouble.

Mr. Bekesi, a fiscal conservative who advocated austerity measures to address Hungary's growing debt problem, lost a power struggle with Prime Minister Gyula Horn over control of the government's privatization program.

The Jan. 28 resignation followed weeks of turmoil over Prime Minister Horn's controversial intervention in a hotel privatization deal, and the subsequent resignation of privatization commissioner Ferenc Bartha. After months of negotiations, government privatization authorities agreed to sell the HungarHotels hotel chain to American General Hospitality, a Dallas-based hotel-management firm, for $57.5 million. But Horn personally intervened to cancel the deal, saying the United States company should pay more.

``These decisions were made for political, rather than economic reasons,'' says Tamas Fabian, chief market analyst for Magyar Daewoo Securities in Budapest. ``Any political interference in a privatization deal sends the wrong message to investors.''

Bekesi's departure highlights an unannounced slowdown in the privatization process that's occurred in recent months. ``We've sold the most attractive enterprises, and for privatization to continue further the government needs to pursue a conscious policy to keep the ball going.... That has not what's happening,'' says Laszlo Csaba, research director at the Kopint-Datorg, a state-financed economic research institute in Budapest.

Bekesi's downfall also weakens the tenuous coalition between the majority Hungarian Socialist Party, the successors to the Hungarian Communist Party, and the more liberal Alliance of Free Democrats. Bekesi's appointment to the finance ministry was an important factor in the Free Democrats' decision to join the government coalition. Economists say Horn's plan to slow down privatization puts in serious doubt the government's $1.3 billion privatization revenue target for 1995.

``It will be impossible to achieve this revenue,'' Mr. Fabian says. ``The state budget deficit and inflationary pressure will grow, which will force the government to further devalue the forint.''

BUT the prime minister appears concerned with consolidating support. ``Horn is a populist, and telling the nation that you've prevented foreigners from buying Hungary cheaply is popular with the voters,'' says Tibor Vidos, a political analyst with GJW Government Relations, a London-based lobbying firm in Budapest. ``It also earns him the support of important industry lobbies who feel threatened by the restructuring that might occur under foreign ownership.''

Hungary has generated $7 billion in foreign investment since 1990, almost as much as the rest of Eastern Europe, Russia, and the former Soviet Republics combined. But the country is now facing increasing competition from Poland and the Czech Republic. No major deal has been completed since the Socialists took power last summer, and planned privatization of the state oil, electricity, and gas companies is likely to be delayed until next year.

Observers will be paying close attention to the progress of a new privatization bill, which is expected to be passed by parliament this month. Mr. Bekesi, who remains in office until then, is sponsoring the bill. ``Investors and government authorities are going to take a wait-and-see attitude until the new law is passed,'' says Michael Kevehazi, managing partner at KPMG Peat Marwick in Budapest. ``If the law is passed without delay, then I think this will have been a temporary setback.''